Starwood Property Trust's Q3 2025: Contradictions Emerge on Credit Migration, CRE Loan Growth, Dividend Recovery, and REO Resolution Timelines

Date of Call: November 10, 2025

Financials Results

• EPS: GAAP net income $0.19 per share; Distributable earnings (DE) $149M or $0.40 per share (DE reduced ~ $0.03 dilution; GAAP reduced ~ $0.04 depreciation related to net-lease acquisition)

Guidance:

• Earnings expected to normalize as $2.3B of recently raised capital is deployed; full earnings power expected to be felt in 2026.
• New net-lease (Fundamental) platform is dilutive near-term (~$0.04 in the quarter) but expected to scale and contribute positively to DE as securitizations expand.
• Plan to resolve REO/nonaccruals on a ~3-year cadence (~1/3 per year), targeting mostly complete by late 2027.
• Maintain elevated origination pace across lending verticals and continue opportunistic CLO/securitization activity to reduce funding costs.
• Deploy current liquidity (~$2.2B headline, normalizing lower) to fund pipeline and repay secured repos.

Business Commentary:

• Earnings and Cash Drag:
• Starwood Property Trust reported distributable earnings of $149 million or $0.40 per share for Q3 2025.
• The company experienced higher-than-normal cash drag due to $2.3 billion in capital raises, impacting earnings temporarily.

• This trend is expected to normalize as new investments and refinancing activities increase.

• Net Lease and Acquisition Impact:

• The acquisition of Fundamental Income properties contributed $10 million in distributable earnings in the partial quarter.
• Due to the timing of the acquisition, the new assets contributed only partly to the quarter's earnings, causing dilution.

• The integration of the net lease platform is expected to create near-term earnings dilution but contribute positively as it scales.

• Credit Quality and Resolutions:

• Starwood Property Trust's lending and REO portfolio has $173 million in impairment and $469 million in CECL reserves, representing 3.8% of their total portfolio.
• The company is resolving higher risk-weighted loans, with $512 million in resolved loans and another $230 million in progress, aiming to recover original basis.

• The improvement in credit quality is due to the resolution of higher-risk assets and the steady credit spreads in the market.

• Investment and Origination Activity:

• The company committed $4.6 billion in new investments, including $2.2 billion in net leases, $1.4 billion in Commercial Lending, and a record $791 million in Infrastructure Lending.
• This was driven by a favorable forward SOGR curve, easing credit spreads, and increased lending activity in core sectors like data centers, multifamily, and industrial.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management highlighted 'record $4.6 billion of new investments', 'total assets $29.9 billion', 'we are positioned to grow and thrive', emphasized strong liquidity and capital markets execution, and said 'full earnings power of these new investments will be felt in 2026.'

Q&A:

• Question from Donald Fandetti (Wells Fargo Securities, LLC): Can you talk a little bit more about your near-term DE expectations? I mean you're running below the dividend. Obviously, the net lease will ramp up and some other factors. Can you just sort of give us a framework there on the timing of covering the dividend?
  Response: DE should ramp as recent capital is deployed; management expects one more rough quarter of dilution and then improving quarters with full benefit into 2026.

• Question from Donald Fandetti (Wells Fargo Securities, LLC): And can you talk a little bit about where we are on the credit migration front and building reserves? I mean do you think -- are we looking at like 2, 3 more quarters of just uncertainty on the credit migration and risk of building reserves?
  Response: They see the troubled subset and expect limited further reserve builds; sponsors are generally recapitalizing and they do not anticipate significant incremental losses beyond asset-specific cases.

• Question from Jade Rahmani (Keefe, Bruyette, & Woods, Inc.): Regarding the REO and nonaccruals, are you expecting sort of a steady cadence of dispositions and ultimate resolution? And over what time frame?
  Response: Management expects to resolve roughly one-third of the problem assets per year under a three-year plan, targeting most resolutions by late 2027.

• Question from Jade Rahmani (Keefe, Bruyette, & Woods, Inc.): I wanted to ask about the multifamily market... Aside from the Florida affordable housing portfolio, what are your views on the multifamily sector? And are you more bullish about the outlook in '26?
  Response: Outlook is improving into 2026 but is highly market-specific; supply is falling and rent growth should accelerate in the back half of 2026, with some markets (e.g., parts of Florida, California) stronger and others (e.g., Austin, Phoenix) weaker.

• Question from Richard Shane (JPMorgan Chase & Co): Is the opportunity window opening/closing quickly due to competition and tighter spreads? What is driving this?
  Response: Competition from private credit and tighter spreads increase pressure, but Starwood is still earning trend returns due to lower funding costs, strong bank financing and scale, and expects to maintain elevated origination volumes.

• Question from Richard Shane (JPMorgan Chase & Co): On data-center financing, how do you think about risks from rapidly depreciating equipment versus property — how is this different from traditional lending?
  Response: Risk is driven by counterparty/tenant credit; loans are amortizing over lease terms with no reliance on residual value, so lending to top hyperscalers is considered manageable under their underwriting.

• Question from Douglas Harter (UBS Investment Bank): The cap rates shown for the new triple-net lease business look around 5%, below peers — anything affecting that short term and where could cap rates get as the business scales?
  Response: The low 5% figure is distorted by partial-quarter accounting; the portfolio implies a ~6.9–7% cap rate with no goodwill, so the 5% view is not representative.

• Question from Douglas Harter (UBS Investment Bank): Can you talk more about the value and how lenders valued Woodstar as you went through that refinance process?
  Response: Cash-out refinancing returned roughly $300M on $75M original equity (~4x), supporting the management view of about a $1.5B+ gain on the affordable portfolio.

Contradiction Point 1

Credit Migration and Reserve Building

It involves differing perspectives on the company's approach to managing credit risk and building reserves, which are crucial for financial stability and investor confidence.

How are you handling credit migration and reserves? Will there be 2-3 more quarters of uncertainty? - Donald Fandetti (Wells Fargo Securities, LLC, Research Division)

2025Q3: We're resolving issues with loans upgraded or downgraded. We've moved some to 4 risk rating due to sponsor equity issues or slower-than-expected leasing. However, we expect these to stabilize soon. Overall, we don't anticipate significant reserve building beyond what's already planned. - Jeffrey Dimodica(President)

Can you comment on credit stability in the portfolio, particularly in life sciences and hotel sectors? - Jade Joseph Rahmani (KBW)

2025Q2: During the quarter, we elevated 17 loans to risk rating 4, representing 79 basis points of total portfolio. These elevated loans were associated with sponsor equity issues or slower-than-expected leasing. As such, we added $8 million of reserve for potential losses during the quarter. Our reserves for loan losses totaled $199 million at June 30. - Jeffrey DiModica(President)

Contradiction Point 2

CRE Loan Growth Expectations

It directly impacts expectations for the company's growth in CRE loans, which is a key revenue driver.

Can you clarify your expectations for CRE loan growth following the recent 6% quarter-over-quarter portfolio growth? - Donald Fandetti (Wells Fargo Securities, LLC, Research Division)

2025Q3: We're on track to end the year close to our record of $10 billion in CRE loans, similar to 2021 figures. - Jeffrey DiModica(President)

Can you clarify your expectations for CRE loan growth considering the recent 6% QoQ portfolio growth? - Donald James Fandetti (Wells Fargo Securities)

2025Q2: We're on track to end the year close to our record of $10 billion in CRE loans, similar to 2021 figures. We expect CRE markets to stabilize, with forward rate expectations moving lower, driving transaction volumes. The environment is favorable for refis, especially for loans from the 2020-2022 era, which could create more opportunities for us. - Jeffrey DiModica(President)

Contradiction Point 3

Dividend Coverage and Earnings Recovery

It involves differing perspectives on the timing and certainty of dividend coverage and earnings recovery, which are crucial for investor expectations and company financial stability.

What are your near-term DE expectations? What is the timeline for covering the dividend? - Donald Fandetti (Wells Fargo Securities, LLC, Research Division)

2025Q3: We see a path to normalizing earnings as capital is deployed. The quarterly earnings ramp-up is expected as capital is put to work. We expect a return to historical earnings power not too far into the near future following capital deployment and additional strategic initiatives. - Barry Sternlicht(CEO & Non-Independent Executive Chairman of the Board)

Jeff, what is the source of the $3 billion deployment—existing liquidity, asset sales, or capital raises? How does this align with the DSS capital raise? - Jeffrey Harte (Bernstein Research)

2024Q4: We expect to earn $1.20 per share for the full year of 2025. Our earnings guidance of $1.20 per share assumes that we deploy $3 billion of capital in 2025, achieving a weighted average return on invested capital of 19%. - Jeffrey DiModica(President)

Contradiction Point 4

REO and Nonaccruals Resolution Timeline

It pertains to the timeline and strategy for resolving REO and nonaccruals, which can impact financial stability and operations.

Are you expecting a steady pace of dispositions and resolution of REO and nonaccrual assets, and over what time frame? - Jade Rahmani (Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q3: We plan to resolve another third by the end of 2027, with a balanced book growth offsetting the drag from resolved assets. The loss of REO assets is expected to be offset by loan growth. - Jeffrey Dimodica(President)

What is the pace of resolving non-performing loans and can you exit them with minimal losses? - Doug Harter (UBS)

2025Q1: Most assets with 5.5 to 6 debt yields should exit at par with forward SOFR in the low threes. - Jeff DiModica (President)

Contradiction Point 5

Credit Migration and Reserve Building

It involves differing views on the extent and duration of credit migration issues and reserve building, which are critical for managing risks and financial prudence.

How are you handling credit migration and reserve building? Are we expecting another 2-3 quarters of uncertainty? - Donald Fandetti (Wells Fargo Securities, LLC, Research Division)

2025Q3: We're resolving issues with loans upgraded or downgraded. We've moved some to 4 risk rating due to sponsor equity issues or slower-than-expected leasing. However, we expect these to stabilize soon. Overall, we don't anticipate significant reserve building beyond what's already planned. - Jeffrey Dimodica(President)

Can you clarify the magnitude of the deferrals and write-downs disclosed in Q1 and whether these increased into Q2? - Adam Howorth (Goldman Sachs)

2024Q4: We have sufficient liquidity to handle any issue that might come up on the credit side. We're at 29% of cash and equivalents and investments. - Jeffrey DiModica(President)